It means things can be done which might be against the word of the policy but passes the essence of them. It's the equivalent of "Use your common sense" – a typical example is if you think something notable that doesn't quite fit in policy is being deleted.

It tries to prevent people getting obsessive and stressed over little things. Stop worrying about the little things: if you're doing things for the greater good, that's all that matters even if it turns out you were wrong.

It allows for consensus to adapt over time, allowing rules to change. Since Wikipedia is consensus, think of it as Wikipedia's jury nullification.

However, many people seem to misunderstand the spirit of the rule, and think it's a convenient excuse to ignore anything they disagree with. This goes against the intention of the rule. Essentially, WP:IAR has some things implied:

Don't cite Ignore All Rules for acting like an idiot. Civility always applies, and don't try to disrupt Wikipedia.

Don't abuse Ignore All Rules if you're an admin using admin features.

Don't use it out of pure laziness. Ideally, read the relevant policies and cite WP:IAR explaining the reasons why, despite the policy also acknowledging that this isn't always possible due to the sheer breadth of policy, guidelines and bureaucracy.

Don't use it to try to create rifts in the community.

Don't use it in an attempt to get around WP:CONSENSUS (deleting stuff that people disagree with in an article, for example).